ECB is considering tweaking its forward guidance on interest rates – Lloyds Bank

According to the analysts at Lloyds Bank, there were indications in its recent meet that the ECB is considering tweaking its forward guidance on interest rates which currently states that rates will be kept at “current or lower” levels for an extended period and “well past” the end of QE.

Key Quotes

“The ECB left policy unchanged on 9 March, as expected, and reiterated that it will scale back its monthly asset purchases to €60bn from April and continue with the programme until at least the end of the year. There were some notable changes to the introductory statement, including that downside risks to growth have become “less pronounced”.”

“In the first instance, we expect the reference to “lower” levels may be removed in June. Comments from some ECB officials suggest that a debate is underway on whether the current negative deposit rate should be raised before the end of QE.”

“Business surveys suggest that euro area economic activity accelerated in Q1. European political risks seem to be having little negative impact on growth. The Dutch election results showed only small gains for the far-right Freedom Party, while latest polls for the French presidential election suggest that Marine Le Pen could win the first round of voting on 23 April, but lose in the final round on 7 May, most likely to centrist candidate Emmanuel Macron. Deflation risks, meanwhile, look to have largely disappeared with headline CPI inflation rising to 2.0%y/y in February, above the ECB’s goal. Prospects for withdrawal of policy stimulus, however, would require a sustained rise in inflation, necessitating an increase in underlying ‘core’ CPI (excluding food and energy) which so far remains stuck at 0.9%y/y.”

“We expect the ECB to continue to tweak its forward guidance on interest rates in the coming months in response to diminishing deflation risks, but it is far too early in our view for it to signal the timing of a rate rise, especially as we believe QE will continue well into next year, albeit at a further reduced pace. We have raised our German 10-year bund yield target to 0.7% from 0.5% at end-2017 and 1.2% from 1.1% at end-2018.”